I. True/False 2 points Indicate whether the sentence or statement is true or fal
ID: 2579143 • Letter: I
Question
I. True/False 2 points
Indicate whether the sentence or statement is true or false.
____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.
____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.
____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.
____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.
____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.
____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.
____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.
____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.
____ 9. The cost recovery method is the most conservative revenue recognition method.
____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.
Explanation / Answer
1-True Revenues are recognized when they realizable i.e collectible and the corresponding process is substantially through On the same lines, gains are recognized when they are realised 2-True Proportional or percentage completion contract method recognizes revenues earned on service contracts which includes the value of services completed before the contract gets completed % Completion= Total value of services done till year-1/Total expected value of services through 3 years 3 years is the contract completion date 1 year: Total services done till year 1 3-True Since the completed contract method is conservative and defer the income recognition until the end of project….it was eliminated 4-True % Completion= Total value of cost s incurred till date /Total expected value of cost to complete the project Based on % we recognize the revenues and costs----accordingly this is an important input 5-False Work completion certificate is issued by engineers and architects …based on which we arrive at the value of costs incurred till date 6-True Under the % completion contract method, construction costs are accumulated in construction in progress and billings are accumulated in Progressive billings a/c….so at the end of project both the accounts knocked off to close the contract….should have the same balance 7-True If the loss is expected in any contract then same shall be recognized immediately owing to prudence principle 8 & 9-True As name suggests under cost recovery method no income is recognized till the cost of the product is completely recovered from sale value Accordingly, it is most conservative method of recognizing the revenue 10-True Operating cycle refers to the minimum time taken to convert raw material/trading good into cash Accordingly, in the installment sales business, cash is collected at every installment and accordingly average date of installements shall be taken